The Financial Conduct Authority (FCA) and Advertising Standards Agency (ASA) have both weighed in on the subject in recent months with at least one consumer complaint being upheld regarding equity release advertising, preying on the fears of older borrowers in respect of the rising cost of living.
Other issues raised by the regulator around advertising include imbalance between the emphasis of benefit and risk; inaccurate or misleading promotions and firms using their FCA-regulated status in a promotional manner.
In a supplementary report published in September 2023, the FCA noted that almost 400 financial promotions had been removed or amended as a result of their review.
A robust process
The standard industry response is to point to the robust factfinding and compulsory advice process which is followed when dealing with clients considering equity release. There is no doubt that the advice process has become more robust over time and that the obligations placed on firms by Consumer Duty will encourage, if not force, increased consideration of clients’ potential future circumstances and the likelihood of foreseeable harm.
It is not enough to rely on the safeguards of tenure for life and the no negative equity guarantee: clients’ income and outgoings must be considered to see whether a more conventional mortgage could be affordable as this is often the best option if it is. Preconceptions about the suitability of equity release from the client’s point of view must be challenged. If firms want to offer robust advice to older borrowers, they should offer all the options available and consider them with equal weight as well as the options which don’t involve a financial product.
These could include downsizing, charity assistance, local authority grants, savings and family assistance.
If you take the comparison of buying a car, which is another major financial transaction, the level of advertising influence becomes clearer. You may have seen multiple adverts for all-electric cars in recent months. This may influence your decision to visit a dealer with a view to buying one. You would, however, go to that dealer in the knowledge that you could equally buy a diesel, petrol or hybrid car, the dealer does not necessarily need to challenge your assumptions about owning an electric car although they may be aware that charging could be an inconvenience.
For a fair comparison with the equity release sector, the example would be someone just being rescued from a desert island they had been stranded on for 20 years walking into Tesla to buy a car. It is up to you as the consumer to inform yourself and consider your options – caveat emptor.
Provide the full picture
With a financial services product, consumers are less likely to be aware of the various options without advice and this is especially true of later life products where a significant number of older consumers do not believe that they can get a mortgage of any sort in retirement. Therefore, to see numerous promotions on television and in the press which focus almost exclusively on equity release and lifetime mortgages is bound to influence someone’s perception of what is available to them.
When you add to this the lifestyle impressions of wealth and freedom implied in many of these adverts, it is no wonder that consumers’ views of the later life market can become skewed.
Changing perceptions
One of the points which is less vocally addressed is the almost subliminal effect that equity release advertising has had, not only on an ageing and potentially vulnerable audience but also on elements of the financial services industry. Many clients have decided that what they need is equity release before they have even spoken to an adviser, often due to the most visible financial promotions as discussed above.
This is also true of advisers in other parts of the industry where, often, older borrowers, say those over 60 or 65, are viewed as a separate demographic which is serviced by equity release advisers.
The truth is that product suitability exists on a continuum where there may be two or three variations which might be suitable for a client but without offering all of these options, the risk of future harm is increased significantly. It is not uncommon for us to receive a referral for a client ‘in need of equity release’ where we end up advising on a conventional mortgage or specialist repayment/interest-only mortgage (RIO) designed for a client going into retirement.
One of the key points with this sort of advice is the holistic nature of the fact find which helps people to clarify their current and likely future finances and supports them to identify vulnerabilities in their position.
How it works in practice
A recent example concerned a client referred to us by an IFA. The client wanted to buy a new property for around £1.7m with finance of £600,000. The pre-existing assumption was that the client would need equity release or, potentially, bridging finance as they had investments which would mature over the coming months. The referral and assumptions were both made in utmost good faith and either product would, arguably, be suitable as, although the client’s evidenced income was comfortable, it was not enough to meet conventional affordability criteria.
Bridging finance was quickly discounted due to the potential timescales for repayment but a lifetime mortgage would have provided the solution very neatly, except… the best interest rate available to the client at the time would have involved early repayment penalties of nine per cent in year one decreasing by one per cent each year meaning a hefty premium on repaying the loan as the client wished.
By applying a holistic and thorough factfinding process we were able to use derived income from investments plus a detailed schedule of lump sum repayments to make a case to a mainstream lender who has accepted the case on a tracker product at 1.25 per cent less than the equivalent lifetime mortgage with no early repayment charges. The savings and benefits to the client in cases like these are self-evident on a case-by-case basis but they are complex to convey within a financial promotion whereas the basic concepts of a lifetime mortgage – release tax-free cash, optional repayments, no negative equity, income assessed etc are relatively easy to convey and undeniably attractive.
